Iran’s Currency Continues to Slump as Further Sanctions Loom

A man walks past a currency exchange shop in Tehran's business district on January 21, 2018.

The exchange rate of the U.S. dollar against Iran’s tuman has had another hike, rising from 3,700 tumans to the dollar in March 2017 to 4,700 tumans to the dollar in January this year.

As in the past when there was a marked drop in the value of the national currency, Central Bank Governor Valiollah Seyf tried to reassure people that the tuman will rally.

This time President Hassan Rouhani also chimed in during a televised interview January 22, saying the drop in the value of the tuman was “temporary.”

“The country’s foreign currency revenue is larger than what we spend in foreign currency,” he said.

There are a series of economic, political, and strategic reasons for the fall in the value of the tuman against the dollar and other foreign currencies.

Economic factors leading to the decline include inflation, the money market, and foreign trade.

1,000 tuman bank note used just before Islamic revolution in Iran. It was equivalent to $150.

1,000 tuman bank note used since 1990's in Iran. Now the bank note is wroth less than 25 cents.

There is also a strong psychological component to the sliding value of the national currency in Iran, where since the Islamic Revolution in 1979, Iranians have viewed the devaluation of their money against the U.S. dollar as a key sign of the deterioration of the country’s economy.

Economic factors

High inflation is by far the main factor in the devaluation of Iran’s currency. The official rate of inflation is 10 percent, which is lower than the rate under ultraconservative former President Mahmud Ahmadinejad, but much higher than the global average rate of around 3 percent and even less in industrialized countries.

Iran’s Central Bank often floods the market with dollars in an attempt to keep the exchange rate artificially low, but analysts warn this practice can lead to unwanted economic surprises, which is exactly what happened in 1995, 2002, 2012, and early 2018.

The artificial reduction of the value of the dollar and market interest rates have in fact had the opposite of the intended effect and have boosted demand for the dollar.

Iran’s trade imbalance of around six billion dollars in just the first 9 months of the year, which began in March 2017 according to the Persian calendar, further exacerbates pressure on the tuman.

Political factors

The protests that overwhelmed Iran in late December 2017 and early January created an atmosphere of insecurity and a lack of confidence in the Iranian market. Meanwhile, U.S. President Donald Trump’s threats to scrap the Iran nuclear deal and the new sanctions he has imposed on Tehran have had a negative impact on the financial market.

Though the EU has so far been committed to the nuclear deal, EU officials have recently criticized Iran’s missile programs, leading to further uncertainty about the future of the deal.

The only silver lining for Iran’s economy is the relatively stable price of oil, but the looming possibility of continued social unrest and a further intensification of sanctions could easily nullify the economic benefits of stable oil prices.